Ocado's Huge Sales Increase Is Proof That Everyone Fundamentally Misunderstands How This Company Works

Online supermarket Ocado reported a Christmas sales increase of nearly 15% (up £6 million) and a 40% increase in items sold. A more complete statement of results is due on Feb. 3. All the other major supermarkets, of course, have reported collapsing revenues and profits over the same period.

Yet OCDO shares are down a little under 2% this morning. Why the gloom? A couple of reasons.

First, there is still some pessimism that Ocado won’t be able to cope if Waitrose ends its delivery agreement with Ocado later this year.

And then there are retail consultancy analysts like John Ibbotson of Retail Vision. Ibbotson has a negative view of Ocado because he thinks it’s like a supermarket. It’s not. Ocado may compete with the supermarkets for customers, but it’s actually a mobile app company and should be regarded as such. Anyone who doesn’t understand that is going to consistently underestimate the effect Ocado is going to have on the British grocery business. Here is what Ibbottson is saying this morning.:

Festive period aside, the fundamental problems in Ocado’s model, specifically of logistics, remain.

With the Big Four now aggressively reducing prices and margins, Ocado will have to do the same: but has it got the scale and financial strength? No is almost certainly the answer.

The deflationary environment we seem to be entering could have a devastating effect on Ocado.

Ocado’s store-based competitors, with their lower costs, are closing in.

The idea that Sainsbury’s (500 job cuts just announced), Tesco (in the middle of an accounting fraud scandal and declining sales) and Morrison’s (just lost a CEO and also in a sales decline) are in a great position to compete against Ocado is optimistic at best. These companies are in disarray, while Ocado is firing on all cylinders.

But the main issue here is the idea that Ocado and Sainsburys compete in the same way for customers. They don’t. Ocado functions much more like a tech company, like Amazon, than a supermarket. It forgoes profits in order to grow sales. CEO Tim Steiner — like Amazon’s Jeff Bezos — doesn’t seem to care whether his company is profitable as long as it’s growing.

Ocado is also very much a mobile app company. The app works like your permanent shopping list, right there on your phone. You can add and update it whenever you realise you’ve run out of something. The search function is great. And it’s good at recommending extra stuff, alternatives, and impulse buys.

More importantly, it has an app-like network effect. Once you’ve done your first Ocado shop, you don’t feel like going back to the supermarket ever again. You want to stick with the app. Even when Ocado doesn’t have exactly what you want, you forgive it because it comes up with an alternative and delivers it for free (mostly).

Most importantly: Ocado is addictive. I asked about a dozen friends and colleagues if they know anyone who has ever used the app and then abandoned it, and answer came there none! No one ever abandons Ocado. It has the customer stickiness of an Amazon or an Etsy. It’s a tech company that happens to deliver food, not a grocery chain that happens to have an app. It’s the Uber of food, in some ways. (Meaning, that if you think Uber is a car company, you fundamentally misunderstand why Uber is going to change transport.)

Ibottson is right about only one thing: The uncertainty over the end of Ocado’s contract with Waitrose. He says, “The high probability that Waitrose will elect to rescind its supply contract will further damage Ocado’s sales and margins.” Quite right.

Ocado finance director Duncan Tatton-Brown brushed this off in the conference call. And while worries there are warranted, those worries are predicated on the idea that not a single other grocery supplier on the planet will want to take Waitrose’s place. But that’s probably not what will happen. Remember, traditional supermarket chains are desperate to seek out extra channels that have sales growth, like Ocado.

If Ocado doesn’t, that will be a serious failure.

But until then, expect Ocado to continue chipping away at the UK supermarket chains, just like Amazon did to Waterstones.